Defensive Savings

What is the difference between something and nothing? The answer is everything. Do you have a savings account or other means to sock money away? If you don't, you may put yourself in a higher risk category than you have ever dreamed.

Start today, and put aside as much as you can into a cash savings account. Have a target of $500.00. That is something. Not having that $500.00 available in your time of need can be a real heart breaker. If you needed immediate cash for something, would you be able to get it? A number of banks allow you to have more than one account under your name. Start with a checking account or money market account for daily or monthly cash management. Then start putting money into a cash reserve savings account. You should target $500, but if you can put away more, that's great. If it's in a higher interest bearing account, all the better to more quickly achieve your primary and secondary savings goals.. If you deplete this account, make sure you replenish it as soon as possible.

The next level of savings you should set as your goal is a reserve of three to six months worth of your normal income. What happens if your job is "right sized" and you find yourself out of work? Or your own small business closes due to unforeseen issues or natural disaster? I have seen that happen way too many times to know it can happen to anyone. While looking for other gainful employment, you will have the option to live on your income reserve account, while you seek other employment. Do not touch this account, unless you have lost your primary means of generating income! If you never need to touch it, then great, it will reflect as a nice asset on your financial statement.

Another area to save in is in long term payments. What I mean by this is you can save money on interest payments (over time) by simply getting out of debt. Paying down any debt you have will yield the same results for you as putting your money into a high yield security over time. You can do this several ways. First is by refinancing your current mortgage for either a better interest rate, or for a shorter term or both (if possible). Also, become laser focused when eliminating your credit card debt. The interest you pay on credit cards is injurious to your financial future. Make higher principle payments on a regular basis and close excess credit accounts.

Lastly, develop a savings plan for retirement. Put away whatever you can afford to do, and target the maximum you can that can be matched by your companies matching policy (if there is one). Whenever you get a raise, increase your savings amount as well. This is typically done through 401(k), 403(b), IRAs or other securities plans that you can contribute to. This is typically a pre-tax deduction from your paycheck, so you end up paying less on your taxes (today), but may be required to pay taxes on that money when you want to cash in on your long term savings. Talk with your tax adviser at least annually.

What does this have to do with our credit score? Everything. If you have the ability to continue to meet your obligations in the face of adversity or recession, then you have protected your credit score. If you develop good savings behaviors and prohibit yourself from making poor buying decisions, you can secure a much better financial future for yourself and your family.